HP bails out on the PC

Sharon Gaudin |
Aug. 18, 2011

The struggling PC business and tablet boom may have pushed HP to consider dumping its PC division.

The acknowledgement Thursday by Hewlett-Packard (HP), the world's largest PC maker, that it is considering spinning off its massive PC manufacturing business means "they see the writing on the wall," as one analyst put it.

In a flurry of announcements, HP also said it is killing off its webOS devices -- specifically the TouchPad and its webOS phones -- and planning to purchase analytics software vendor Autonomy for $10 billion in cash.

News that HP may get out of the PC business wasn't a surprise to some analysts, especially given the decreasing focus by consumers, and even enterprises, on desktops and laptops. The quick rise of tablets, particularly Apple's iPad, is not good for companies that have invested billions of dollars in building and selling PCs.

"Right now, we're just speculating about HP's motives, but, to me, I think that they see the writing on the wall with PCs," said Dan Olds, an analyst with The Gabriel Consulting Group. "It's a low-growth and very low-margin business these days and that's not likely to change in the future."

According to HP, its Personal Systems Group (PSG) is worth $40 billion in annual revenues. The PSG includes personal computers, technical workstations, WebOS-powered tablets and smart phones, as well as personal storage solutions.

In the second quarter of this year, HP, which has long been the largest PC manufacturer in the world, accounted for 17.4% of global shipments, according to industry analyst firm Gartner.

Just last month, Gartner noted that HP was holding strong even as it faced new challenges in its consumer PC business.

The trouble, as it has been for months now, is that the burgeoning tablet market has hammered the PC market, especially in the U.S.

A recent Gartner report noted that sales in the worldwide PC market have been slowing. For instance, global PC shipments were up only 2.3% in the second quarter of this year. Gartner had earlier expected them to be up by 6.7% during that period.

"There are other areas where HP can invest its time and money to get a better return and higher growth rate," said Olds. "So it makes sense to get out of the business if that's their rationale. Spinning it off rather than selling it is due to the fact that there aren't a lot of buyers who have the desire and the money to take it off HP's hands."

He also noted that this isn't all that different from what IBM did with its PC division, when Lenovo took its own PC manufacturing business off IBM's hands.

The difference here is that HP is on top of the PC manufacturing heap. IBM was not.

Rob Enderle, an analyst with the Enderle Group, said IBM may have offered HP a good example to follow.

"IBM has been incredibly successful after the PC company sale and, more recently, Lenovo has been the fastest-growing PC company," he added. "That example alone likely would justify this move."

But Charles King, an analyst with Pund-IT, Inc., said the HP move caught him off-guard -- especially, given the company's position in the market.

"I'm surprised mostly by the audacity of the move," said King. "PCs -- and dominating the PC market -- after all, were critical points in HP's 2001 Compaq acquisition. The company's Personal Systems Group also generates more revenue than any other HP business unit. That's nearly one-third of HP's overall revenue. Even spun-off, it'd be a formidable company."

King agreed, however, that PC manufacturing is a tough business.

HP's PC unit delivers lower overall operating profits, on a percentage basis, compared to its higher-margin business IT solutions and services. PC sales also tend to be more volatile than business IT, with sales that are particularly sensitive to seasonal buying trends and economic hiccups.

In that vein, King said getting rid of the PC business could ultimately be a smart move for the company.

"The future for HP is more enterprise hardware, more software and more services -- in other words, a business more like IBM," he noted. "In that version of things, PCs, at least the consumer side of the business, are mostly extraneous, so if this happens, it could be very good for the company."